Relationship between capital mobilization indicators and economic growth

Although capital mobilization is an important determinant for economic growth in any country, its key indicators such as saving deposits, loan to private sector, market capitalization, domestic investment, foreign direct investment, profitability, interest rate, inflation, and trade openness have experienced continued decline and challenges in Pakistan. In order to understand this problem and suggest possible solutions, the study investigates the relationship between the capital mobilization variables such as commercial banking (saving deposits; loan to the private sector; profitability), market capitalization, investment (domestic investment; foreign direct investment) and non- banking factors (interest rate, inflation, and trade openness) and economic growth (GDP) in Pakistan. The study, further, reviews the 1997 financial crisis to study its effect, if any, on the economic growth of Pakistan. The study finally identifies a predictive model of economic growth in Pakistan in comparison to other five ASEAN (Indonesia, Malaysia, Philippines, Thailand, and Singapore) countries. The study may be useful for the policymakers who may use the predictive model to link the financial sector indicators to the economic growth of Pakistan. The methodology involved the use of time series analysis on panel data from the years 1980–2015. As part of the study the ‘before after’ effect of 1997 Asian financial crisis on Pakistan’s economy was also examined using Augmented Dickey-Fuller test of stationarity. Further, the Johansen cointegration test using E-views was employed to plot the relationship between independent and dependent variables. The Granger causality test was then applied to identify the causality among independent and dependent variables. This helped to build a predictive model of economic growth in Pakistan and other ASEAN countries. The findings from Augmented Dickey-Fuller test indicate that the 1997 Asian financial crisis had no significant effect on Pakistan’s economic growth. The data analysis also reveals that there was no significant difference in economic growth before and after the financial crisis. Further, Johansen cointegration test reveals that with the exception of interest rates, saving deposit, loan to the private sector, market capitalization, domestic investment, foreign direct investment, inflation, profitability, and trade openness are significantly related to economic growth. From Granger causality test it was found that in Pakistan, the foreign direct investment and loan to private sector predicts GDP and GDP predicts saving deposits, foreign direct investment, and market capitalization. In Indonesia, foreign direct investment, inflation, and trade openness predict GDP and GDP predicts saving deposit and domestic investment. In Malaysia, only the trade openness predicts GDP and GDP predicts domestic investment, inflation, and interest rate. In the Philippines domestic investment, inflation, and interest rate predict GDP and GDP does not predict any of the independent variables. In Thailand, only the interest rate predicts GDP and GDP predicts loan to the private sector, domestic investment, inflation, and profitability. Finally, in Singapore saving deposit and trade openness predicts GDP and GDP predicts market capitalization, domestic investment, inflation, and profitability.